THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

PAULA ZAHN, CNN ANCHOR: And good evening, everyone. Thanks so much for joining us tonight. Tonight's top stories: For the very first time, we hear from the priest who allegedly abused disgraced Congressman Mark Foley when Foley was just a child -- the priest describing in graphic detail swimming nude with the young Foley and giving him a massage.

A top U.S. general in Iraq says the increasing violence there is disheartening, a startling pessimistic public statement in a month that has seen 73 Americans killed so far.

On to the "Security Watch": the new danger in the border with Mexico, Middle Eastern terrorists hiring drug smugglers to sneak them into the U.S.

Now on to the "Top Story" of the day: the dramatic new developments unfolding in the Mark Foley page scandal. After the Republican congressman sexually suggestive e-mails made headlines, he resigned, checked into rehab, and claimed he was molested by a priest when he was young.

Until now, the accused priest of his whereabouts remained a mystery, but, tonight, sources tell us he's retired and living on island of Gozo, near the Mediterranean island of Malta, where we managed to reach him by phone.

Not only did he tell us his side of the story; he also made some disturbing admissions about his relationship with a young Mark Foley.

For the very latest, let's go to Susan Candiotti who is standing outside the Sacred Heart Church in Lake Worth, Florida, where Foley was once an altar boy -- Susan.

SUSAN CANDIOTTI, CNN NATIONAL CORRESPONDENT: Father Anthony Mercieca says he was a friend of the Foley family, even shared Christmas dinner at his home.

But his relationship with the future congressman appears to have gone much further.

(BEGIN VIDEOTAPE)

CANDIOTTI (voice-over): Father Anthony Mercieca says it's all a matter of how you look at it, describing the kind of intimate contact he says he had with a teenage Mark Foley. FATHER ANTHONY MERCIECA, FORMER PRIEST OF MARK FOLEY: See abuse, it's a bad word, you know, because abuse -- you abuse someone against his will. But it involved just spontaneousness, you know. But, anyway, whatever it was, you know, molestation, I guess. And that's what happened.

CANDIOTTI: Father Mercieca, now retired, lives on the Maltese island of Gozo, near Italy. He talked by phone with both CNN's PAULA ZAHN NOW and CNN affiliate WPTV.

Sources familiar with the investigation say he's the Catholic priest Mark Foley claims molested him as a teen nearly 40 years ago. Father Mercieca told CNN his memory is now a bit fuzzy about one incident. The priest admits he might have gone too far when he was mixing tranquilizers and alcohol to treat depression.

MERCIECA: Once, maybe I touched him, or so,but didn't -- it wasn't -- because it's not something you call, I mean, rape or penetration or anything like that, you know. We were just fondling.

CANDIOTTI: A source familiar with the investigation tells CNN, Mercieca was assigned to Sacred Heart Church in Lake Worth in the mid- '60s.

Foley was an altar boy there. Mercieca says they took trips to New York and Washington.

MERCIECA: We became, more and more, friends, almost like brothers.

CANDIOTTI: Father Mercieca tells CNN, he and Foley went skinny- dipping and took saunas wearing only towels. Sometimes, he says, he massaged the teen's bare shoulders. The priest told CNN he's baffled by the timing of Foley's disclosure.

MERCIECA: I would say that, if I offended him, I am sorry, but to remember the good time we had together, you know, and how, really, we enjoyed each other's -- each other's company, and to let bygones be bygones.

CANDIOTTI: One long-time parishioner says she's appalled that Foley waited so long to come forward, and is angry at Father Mercieca.

GISELLE BASANTE, LONGTIME PARISHIONER: He never been a priest. He never been blessed by God. He was a rotten apple in a tree.

CANDIOTTI: Foley's attorneys have no comment on what the priest said.

The Catholic Church says it will investigate whether there are any other alleged victims.

MARY ROSS AGOSTA, SPOKESPERSON, ARCHDIOCESE OF MIAMI: We offer counseling to both the victim -- the alleged victim and the alleged abuser. We will do an independent review board investigation.

CANDIOTTI: Counseling, Father Mercieca says that's just what his former so-called brother needs.

MERCIECA: But, anyway, he will overcome it with a psychiatrist, you know. Mark is a very intelligent man, you know?

Let's go straight to two people very familiar with the case. Alessio Vinci is in Gozo, Malta, tonight, where it's just past midnight, and Matthew Doig, one of the reporters who broke the story of Father Anthony Mercieca in today's "Sarasota Herald-Tribune."

Good to have both of you with us.

So, Alessio, what is the reaction there in Malta to Father Mercieca's admission here?

ALESSIO VINCI, CNN ROME BUREAU CHIEF: Hello, Paula.

Well, we arrived here around midnight, about two hours ago. It's now 2:00 in the morning. And it's a horrible, rainy day here in Gozo. So, there are absolutely no people in the streets that we could meet to talk about this Father Mercieca.

We did, however, go straight up to his residence in downtown Mercieca -- in -- in downtown Gozo, in the old part of the town. And we tried to knock on his door. We called his number. We identified ourselves. But there was no reply.

At some point, one of his neighbors opened the door, opened a window. And we asked about Father Anthony Mercieca. And this person was confused. He said that there was no Father Anthony Mercieca that was living there, but, actually, a Father George. And we understand that Father George actually is the brother of Father Anthony, and that they -- the two live together.

But there was no sign of Father Anthony at that residence tonight. So, clearly, we got the -- the impression from the few people that we managed to speak tonight that they -- this man, this Father Anthony, is not a popular person here. He has been arrived here -- he arrived here only a few years ago.

We did speak to the local diocese here -- and the bishop, in a statement, staying that they will investigate, and he will -- he will cooperate with an investigation here.

So, clearly, the diocese here wants to get to the bottom of this -- Paula. ZAHN: Thank you.

Matthew, I think what is so stunning to any of us hearing this conversation for the first time that took place over the phone is what seemed to be the -- the total lack of remorse in his voice when he talked quite I guess you would say obliquely about the fact that he'd had a nervous breakdown some 40 years ago, and -- and recounting all these past experiences with Mr. Foley.

MATTHEW DOIG, REPORTER, "THE SARASOTA HERALD-TRIBUNE": Yes.

He -- he clearly felt that a lot of their encounters, the skinny- dipping and the back massage and all that, I mean, he said, in hindsight, I know people are going to think that was inappropriate, but, he said, at the time, it was totally innocent behavior, except for that one incident.

I mean, when he talked about that, there -- there seemed to be some -- some shame in his voice. It seemed like he couldn't bring himself to really come right out and say exactly what that -- what happened on that one night.

ZAHN: Did he tell you he ended up being naked with Mark Foley? There seems to be some debate about some of these details surrounding his admission.

DOIG: Yes.

The -- the -- the towel in the sauna is the first time I'm -- I'm hearing that there was a towel. He -- he had said that they -- they skinny-dipped naked. In fact, he said he had just come from Brazil, where skinny-dipping was quite common, and he saw nothing wrong with that.

And he did say, in the sauna, that the two of them were naked. And, again, he thought that was fine in -- in the setting of a sauna, and that the massage naked was also nothing that should be considered inappropriate, although he did acknowledge that people would see it that way.

ZAHN: So, he's basically, Matthew, saying, if you take everything he has said and added it up together, that molestation is in the eyes of the beholder?

DOIG: Well, that's hard to say.

Like I said, those other incidents, with the skinny-dipping and all that, he is -- is not saying that that's molestation. I saw you guys reported earlier that he's saying he fondled Mark Foley, and that -- that Foley -- it wasn't abuse because -- because Foley enjoyed it.

But, I mean, I think, clearly by any definition, that would be molestation, even if he's not coming out and saying: Yes, I molested Mark Foley.

ZAHN: Matthew Doig, Alessio Vinci, we have got to leave it there. And I'm sure we will hearing -- be hearing plenty more about this in the days to come.

Right now, we're going to make a pretty big turn to a very important story, our "Top Story" in the Iraq war, a very startling admission today from the U.S. military: An all-out drive to crush insurgents in Baghdad with thousands of extra troops has stalled, and Baghdad is bleeding through one of its worst months yet.

As senior Pentagon correspondent Jamie McIntyre reports, it's another stumble in the president's plan for victory.

(BEGIN VIDEOTAPE)

JAMIE MCINTYRE, CNN SENIOR PENTAGON CORRESPONDENT (voice-over): The latest U.S. strategy, simply stated, is, as goes Baghdad, so goes the country -- and, from the top military spokesman, a simple admission: At the moment, Baghdad is not going so well.

MAJOR GENERAL WILLIAM CALDWELL, U.S. ARMY SPOKESMAN, COALITION FORCES IN IRAQ: The violence is indeed disheartening.

MCINTYRE: What's disheartening, Major General William Caldwell noted, is that attacks are up 22 percent in the past three weeks, that Operation Together Forward, the joint U.S.-Iraqi effort to secure Baghdad, has, in his words, not met overall expectations, and that, now, the U.S. and Iraqi government must figure out -- quote -- "how to refocus the effort."

CALDWELL: We're taking a lot of time to go back and look at the whole Baghdad security plan. We're asking ourselves if the conditions under which it was first devised and planned still exist today, or have the conditions changed, and, therefore, a modification to the plan needs to be made.

TONY SNOW, WHITE HOUSE PRESS SECRETARY: The White House listens to the generals, but I would caution you against saying it's not working, because that's not their view.

MCINTYRE: The White House was quick to downplay the sober assessment from the military, insisting it amounted to routine adjustments.

SNOW: Tactics change all the time. Generals talk about changing tactics all the time. It happens regularly. It is nothing new in a time of war.

MCINTYRE: While the U.S. military expected casualties to go up with the Baghdad offensive in the holy month of Ramadan, at this pace, October will surpass the high of 137 deaths the U.S. suffered back in November of 2004.

Still, the White House dismissed as a lot of hooey the idea that the recommendations from an independent Iraq Study Group would result in a major course correction, such as dividing up Iraq.

SNOW: Yes, partition, nonstarter.

MCINTYRE: What about a phased withdrawal?

SNOW: You know, you withdraw when you win. Phased withdrawal is a way of saying, regardless of what the conditions are on the ground, we're going to get out of Dodge.

MCINTYRE: The White House position is that failure in Iraq would be so catastrophic, there is no option, other than to finish the job.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We will fight. We will stay, and we will win in Iraq.

(CHEERING AND APPLAUSE)

(END VIDEOTAPE)

MCINTYRE: The one option the White House did not rule out is an infusion of more troops some time in the future. As White House spokesman Tony Snow repeated, what U.S. generals asked for, they will get -- Paula.

ZAHN: Jamie McIntyre, thanks.

Now we're going to turn to the reality on the ground tonight, with scores of new Iraqi dead in another day of shootings and bombings and more American troops killed.

Michael Ware now joins us from Baghdad.

So, Michael, what's the very latest tonight?

MICHAEL WARE, CNN CORRESPONDENT: Well, the latest, Paula, is that this is just another day in -- in Iraq.

What we have seen is the announcement of the deaths of three more service personnel over the last 24 hours. We have seen 31 more executed bodies, the result of sectarian violence, appear on the capital streets this morning.

And, across the country today, 41 Iraqis have died, 11 in Mosul when a suicide bomber, using a fuel tanker, attacked the police headquarters. We had another 11 more killed in Kirkuk, when yet another suicide bomber attacked soldiers as they went to collect their pay.

In Baghdad, five people were killed in a roadside bomb, a police officer assassinated. In Diyala Province, seven people were killed in a crowded market bombing. Two executed bodies showed up. Four other people were shot.

This is just another day -- Paula.

ZAHN: And a lot of people were stunned to hear that announcement by that top U.S. military spokesperson, admitting that -- that the plan is not working.

What is the reaction on the ground to the fact that this plan wasn't enough?

WARE: Well, it shouldn't really come as any surprise.

I mean, the plan only had limited goals from the beginning, or expectations. I mean, this was all about perception. The idea wasn't to actually break the back of the insurgency or the militias or the death squads that actually have the grip on Baghdad, as opposed to the U.S. military. The military knows they can't do that, not with the forces they have got, not with the mandate they have.

So, it was to give the appearance of security to try and prop up a paper-thin prime minister, Nouri al-Maliki. I mean, a lot of the plan involves coordination with Iraqi security forces. Yet, U.S. commanders talk openly about the leakage of information, because these security forces are penetrated by the insurgents, death squads and militias that the battle of Baghdad plan was supposed to address -- Paula.

ZAHN: All right, Michael, we would like to you stay right there. We're going to come back to you in Baghdad in just a few minutes. Thanks.

We keep hearing we won't be leaving Iraq until we win. Coming up: the shifting definitions of what winning actually means.

Then, on to our top legal story: outrage over the case of two U.S. Border Patrol agents just sentenced hours ago for shooting a drug suspect.

(COMMERCIAL BREAK)

ZAHN: We continue our "Top Story" on the war in Iraq.

Is victory even possible, when the capital, Baghdad, is turning into what some say is a bloody quagmire? For some military leaders, the question increasingly boils down to this: What exactly is the definition of victory?

Our Pentagon correspondent, Barbara Starr, has been taking a look at this question and what it means for the U.S. mission in Iraq.

(BEGIN VIDEOTAPE)

BARBARA STARR, CNN PENTAGON CORRESPONDENT (voice-over): In April of 2003, it seemed victory was at hand. The tyrant was gone, and Iraqis would welcome the U.S. troops as liberators, or so the Bush administration thought.

But the mission, defined in those days as creating a peaceful and flourishing democracy in Iraq, has yet to be accomplished. And the unending violence has left the definition of victory up in the air.

QUESTION: Just the simple question, are we winning?

TONY SNOW, WHITE HOUSE PRESS SECRETARY: We're making progress. I don't know. How do you define winning? GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I define success or failure as to whether or not the Iraqis will be able to defend themselves.

STARR: In this war, the military is having to define victory not as something that can be done by using U.S. military force alone, even though U.S. military lives are on the line.

Indeed, the Pentagon has long said that political and economic progress would be vital to a win.

DONALD RUMSFELD, SECRETARY OF DEFENSE: What's happening is, you have got a situation where it's not possible to lose militarily. It is also going to require more than simply military power to prevail.

STARR: More than half-a-century ago, on the beaches of Normandy, American G.I.s knew their job was a straight military victory over the Nazis.

In Desert Storm, Joint Chiefs Chairman General Colin Powell held to a doctrine of decisive military force, to avoid unclear and frustrating military aims of Vietnam, where he had fought as a young man.

GENERAL RICHARD NEAL (RET.), U.S. MARINE CORPS: And he didn't to amble in, as we had in Vietnam, that he didn't want to go in as a one -- to use the analogy of a -- of a one-arm puncher in a -- in a boxing ring.

STARR: In Iraq, today's young troops risk their lives in a tough fight against a shadowy enemy that doesn't appear to be weakening.

For the troops, it's difficult to see what victory really means.

RETIRED BRIG. GEN. DAVID GRANGE, CNN MILITARY ANALYST: I think that soldiers have -- it has to be explained to soldiers, especially in today's conflicts, that the military is only one part of the -- the tools, the -- the means to achieve victory.

STARR: In Mahmoudiya, Iraq, the men of Bravo Company have learned to define victory on a personal scale.

LIEUTENANT GEORGE WEBB, U.S. ARMY: We let them know that, hey, we're human, too. We're not just people that ride around in vehicles, never dismount or anything. So, now we get out here. Attitudes change.

STARR: After more than three years and nearly 2,800 Americans dead, these days, the ambitious goal of creating a tidal wave of democracy and prosperity that will sweep across the Middle East seems distant.

(on camera): Victory in Iraq, for now, can probably be simply best defined as getting the level of violence down, to the point that the new Iraqi government can survive and U.S. troops can leave.

Barbara Starr, CNN, the Pentagon.

(END VIDEOTAPE)

ZAHN: And now a "Top Story" panel on the danger of defeat and the chance for victory in the war in Iraq.

Joining me tonight, the man you just saw in Barbara Starr's piece, military analyst General David Grange. Thomas Ricks is a reporter for "The Washington Post" and author of "Fiasco," a bestselling book on the war in Iraq. And with me again from Baghdad, our own Michael Ware.

Tom, we heard the president describe victory as the Iraqis being able to defend themselves. How would you define victory?

THOMAS RICKS, MILITARY CORRESPONDENT, "THE WASHINGTON POST": I don't think it is definable at this point.

I think the discussion really is becoming, is Iraq salvageable, not, is there going to be a good outcome, but what's the least best that -- what's the least bad outcome we can aim for? And I think that's what you're going to see in the discussions about changing course after the midterm elections.

ZAHN: What do you think is the least bad outcome?

RICKS: I don't know. It really depends on what the Congress, what the administration, and what the Iraqi people, most of all, can find as some sort of compromise or settlement.

What's being discussed is, do you break up the country somehow? Do you go to some sort of extreme autonomy, but try to hold the country together, or do you withdraw U.S. troops to the borders to try to contain the mess that you have left behind?

ZAHN: General Grange, what do you think needs to be done to turn things around?

GRANGE: Well, first of all, the -- what needs to be done is, one, stem the influence of Iran and Syria, especially Iran. A lot of this influence you have right now on violence is -- is manipulated by Iranian agents and their strategy. I mean, their strategy is actually working in Iraq.

The other thing that has to be turned around is this -- at least this elected government has to survive, with a reliable Iraqi military supporting it, and the people having freedom from fear. Those things have to be established. You notice I said that does not mean the measure of success that we leave.

ZAHN: Well, let's ask Michael Ware about those two points you have just made.

I have got to imagine that there's got to be a huge concern that the insurgents will be actually emboldened by what that top U.S. military spokesperson had to say, when he said things aren't going as planned.

WARE: Well, of course, that's exactly what they're after. But, I mean, that just reflects the reality on the ground. I mean, it's not as if that was a secret to anyone here.

And, in terms of victory, one of the ways of looking at it is to ask, in terms of American interests, in terms of, theoretically, the Western alliance interests, and the international community, much more loosely, is a secure, stable state in Iraq, able to defend itself, protect its borders, and whose interests are at least mutual to the West and the international community, if not actually friendly.

And what's happening now in no way is developing this end state. You are not on the path to that, as it stands right now.

ZAHN: Tom, you helped us better understand why you think it's so difficult to define victory and what a victory might ultimately look like. Is it any easier to define what a loss would be for the United States?

RICKS: Yes. I think it's more of the same for many years to come. And, ultimately, either the American people or the Iraqi people, or both, get just simply sick of the Americans messing around. And a real loss would be when the Iraqis said: Fine. Just get out of here. We're going to unify ourselves under an anti-American, anti- Western banner.

There's a precedent for that. And they go out and find themselves a younger, tougher, more vicious person than Saddam Hussein, who unites the country under an anti-American banner. And then we have an entrenched enemy with oil money who can go buy himself some nuclear weapons -- that is to say, exactly the problem that the Bush administration falsely thought it faced in 2003.

ZAHN: General Grange, you get the final word. What are the chances of -- of that playing out the way that Tom Ricks was talking about?

GRANGE: Well, a very good chance that it will, if -- if -- especially if the enemy gets their way in -- in degrading the resolve of the United States to finish this out. Victory's going to be harder to find.

If we do leave, and those conditions are in there with a -- some type of a stable government and -- and the stemming of the Iranian influence, we will be back again. I mean, this is going to become a regional issue. It still may, but we will be back again if we lose. There's no doubt in my mind.

ZAHN: Gentlemen, we're going to leave it there.

General David Grange, Thomas Ricks, Michael Ware, thank you.

Our "Top Story" next is in the legal arena. And it's caused outrage on the border. Two U.S. Border Patrol agents in Texas sentenced just hours ago for shooting a suspected drug smuggler. But they didn't know that at the time.

Also, our "Top Story" in the "Security Watch": Border Patrol agents facing a new danger, Middle Eastern terrorists teaming up with smugglers to sneak them into this country.

(COMMERCIAL BREAK)

ZAHN: Our top legal story tonight is one that has my colleague Lou Do -- Dobbs -- yes, that is his name, Dobbs -- has been following, and it has left him absolutely outraged.

It takes us to the U.S.-Mexican border, where a heated debate about the fate of two U.S. border agents has reached a boiling point. Just hours ago, the agents were sentenced for shooting and wounding a suspected Mexican drug smuggler last year. The man survived and got away.

Well, tonight, some very tough questions are being asked about an urgent need to defend our border vs. the appropriate use of force.

Casey Wian takes us to Texas border country for this eye-opening story.

(BEGIN VIDEOTAPE)

CASEY WIAN, CNN CORRESPONDENT (voice-over): Federal Judge Kathleen Cardone sentenced Border Patrol agents Ignacio Ramos and Jose Compean to 11 and 12 years in federal prison respectively. Ten years of that was a mandatory sentence for using a gun to commit a crime.

UNIDENTIFIED FEMALE: It is a draconian punishment to -- to blindly assess a 10-year punishment to somebody like that. I -- I hope the Congress would consider amending that statute.

WIAN: Last year, the Border Patrol agents were trying to apprehend a Mexican drug smuggler driving a van loaded with 743 pounds of marijuana. The smuggler fled, a struggle fouled and the agents shot at the man, thinking he had a gun. The smuggler fled across the border to Mexico. The agents thought he was uninjured.

UNIDENTIFIED MALE: I was doing the job the public entrusted me to do. They entrusted me to stop a drug smuggler and I did.

WIAN: The Border Patrol's usual penalty for not reporting a shooting is a suspension. Instead, federal prosecutors charged the agents with attempted murder, assault, civil rights violations and using a firearm to commit a crime. Both agents say they had clean disciplinary records. In fact, Ramos had been nominated for Agent of the Year.

The drug smuggler was given immunity from prosecution to testify against the agents. Ramos and Campean were convicted in March of all charges except attempted murder. The case sparked nationwide outrage from the public, from fellow Border Patrol agents, who held a rally Wednesday in support of the agents, and from members of Congress, who promise to investigate the Justice Department's decision to prosecute by the end of the year.

Campean and Ramos could have been taken to prison immediately, but the judge gave them until January 17th to surrender.

UNIDENTIFIED MALE: I'm more interested in what -- I'm going home with my family tonight.

WIAN: Both agents plan to appeal their convictions.

(END VIDEOTAPE)

WIAN: While prosecutors defended their case, saying the two agents broke the law and deserved to go to prison, family members wept in court at the sentencing of two brave Border Patrol agents who were only trying, they say, to defend the nation's borders -- Paula.

ZAHN: Casey Wian, thanks.

Lou Dobbs has been on top of the story and the border security issue for some time with his "Broken Borders" reports and he joins me now.

Welcome back from the nation's heartland.

Why are you so outraged about the outcome of this trial?

LOU DOBBS, CNN ANCHOR: Well, a couple of things. One is it is an administrative offense to fire your weapon and not file a report, as they did. Secondly, there is no probative evidence that they did not truly believe they were in danger of their lives. The second is the priorities, on the part of the U.S. attorney, who is Johnny Sutton, Debra Kanof, his assistant U.S. attorney, who was the prosecutor here.

I mean, this is an outrageous, outrageous prosecution. The verdict, the sentencing is outrageous. Three jurors have said they felt they felt that they were coerced in their verdict.

ZAHN: Let me go back and try to dissect some of the facts of this case that you were just talking about. The government says it had a very serious case here. They allege that these two border agents fired at a man they knew was unarmed and a man who attempted to surrender.

DOBBS: That's what the prosecutor's saying. But there -- and I've gone through the transcript of the trial. There's no probative evidence that puts into dispute their statements.

ZAHN: Well, they claim they saw the guy's open hand. They could see he wasn't armed before he turned around and fled. And they also make the argument that they shot at him with 15 rounds.

ZAHN: It's not my point, it's the U.S. government's point. DOBBS: Well, it's the U.S. government's point, and let me go through a couple of things with you. One, this drug dealer, and was not in clear sight for both agents at the same time.

ZAHN: All right, but the fact that...

(CROSSTALK)

DOBBS: Paula, I like you too much for you to interrupt me. I certainly would never interrupt you.

ZAHN: But that's an important fact.

DOBBS: Yes it is. And so let's get to these facts.

ZAHN: So they didn't know who this guy was, they followed him through a little town.

DOBBS: What do you mean, they didn't know? Yes, they did. Absolutely. Seven hundred pounds of marijuana, are you listening?

ZAHN: They didn't know that at the time.

I am listening. I'm not playing defend the government here, I'm just trying to outline the government's case here.

DOBBS: Over how many miles did they have their lights on, chasing this drug dealer?

ZAHN: Let me get my little factoid sheet out, because I memorized like forty of them.

DOBBS: OK. The fact is, they were trying to bring this guy down, and they did, and he ran away. And they fired when he thought, he says he thought, that there was a weapon.

ZAHN: Let's go on to another point the prosecution made, that if these guys had nothing to hide, why did they try to cover up what they did?

DOBBS: What they did is pick up their brass and not file a report. Both agents have said they wish they had not done that and wish they'd turned it in. But at the same time, there were seven U.S. Border Patrol agents there, including two supervisors at various points.

ZAHN: And isn't it also true that there is a rule of engagement that says that you have to talk to your supervisor...

DOBBS: Let me help you out.

ZAHN: Is that true or not?

DOBBS: No, listen to me. If any other Border Patrol agent had fired his or her weapon, that is an administrative offense for not filing a report. ZAHN: Right.

DOBBS: That is precisely what happened. Now, think about what this U.S. attorney did. They come at them with attempted murder charges, all sorts -- I mean, they threw the book at these guys. What did they do with the drug smuggler who brought the charges? The drug smuggler is now filing a civil suit for $5 million against the U.S. government, two Border Patrol agents, who have absolutely clean disciplinary records are sitting here looking at a combination of 23 years in jail.

Now, you ask yourself something -- three jurors say that they felt they were coerced into that verdict. They want their verdicts back. Secondly, you're looking at the -- one of the areas in Texas that's under the strongest influence of the Mexican drug cartels imaginable. We're talking about a $40 billion industry.

And you have a couple of U.S. Congressmen trying to appease the Mexican government. This is a politically motivated case. Debra Kanof, the prosecutor in this case, actually had the temerity to say to these agents, who are both Hispanic, saying, you turned on your own people, speaking to American citizens, U.S. Border Patrol agents, you tell me what's going on.

ZAHN: Well, if people want to take the time, they can start rifling through these documents. It's fascinating.

DOBBS: It is fascinating.

ZAHN: It's understandable why this is so darn controversial.

DOBBS: Well, it's not that controversial.

ZAHN: They're giving me the big wrap here, Lou. We got to move on, we got to pay for this.

DOBBS: They can give you the wrap but let me finish one thing.

ZAHN: Good, my producer will kill you, not me.

DOBBS: OK. Let him kill me.

The fact of the matter is that the U.S. Congress is now calling for an investigation and I will make you a prediction.

ZAHN: You will?

DOBBS: This doesn't stand.

ZAHN: All right. Well, we'll see. We'll bring you back.

DOBBS: You got it.

ZAHN: OK. Thanks, Lou.

You can you find more on the border security and other issues in Lou's latest book -- after he argues with me, I'm going to say the name of this book?

DOBBS: Shout it. Shout it.

ZAHN: No, you say it.

DOBBS: "The War on the Middle Class: How Government, Your Government, Big Business and Special Interest Groups Are Waging War on the American Dream and How to Fight Back."

And that last part is real important.

ZAHN: Oh, it is?

DOBBS: You better believe it.

ZAHN: Thanks, Lou.

Coming up next, our top story on the security watch. Also, deals with the Border Patrol. New concern over Middle Eastern terrorists teaming up with drug smugglers to cross the border with Mexico.

(COMMERCIAL BREAK)

ZAHN: Just ahead in this half hour, a raging controversial over the Coast Guard. Does it really need to use the Great Lakes for gunnery practice? And then at the top of the hour, Senator Barack Obama is Larry's guest.

Our top story, the security watch tonight, a new congressional report warns that dangerous drug cartels along the Mexican border are moving into a new business, smuggling in people from the Middle East, some with terrorist connection to groups like Hamas and Hezbollah. As the border grows more dangerous, the Border Patrol is out there, outnumbered and outgunned.

Ed Lavandera look at the frightening new dangers facing the Border Patrol.

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ED LAVANDERA, CNN CORRESPONDENT (voice-over): This is the kind of encounter that gives a border sheriff's deputy chills.

UNIDENTIFIED MALE: They're moving around each side of us and actually coming up into the U.S.

LAVANDERA: Earlier this year, two men carrying automatic weapons came within 100 yards of this lone deputy on patrol in Hudspeth County, Texas, his small sidearm no match to their high-powered hardware.

(on camera): A new congressional report says it's not just drug cartels we have to worry about, but rather something even more ominous, cartels teaming up with Islamic terrorists, creating narco- terror cells. And the report says cartels have never been better equipped to not only smuggle drugs but even people into the United States.

(voice-over): The Border Threat Report says that since 9/11 there's been a growing number of Middle Eastern immigrants, some with connections to Islamic terrorism, entering the United States illegally at its southern border. Even more troubling, some are changing Islamic names to Hispanic-sounding names complete with fake travel documents to blend in on the busy border.

Representative Michael McCaul is the chairman of the congressional subcommittee that authored the report. He says the cartel-terror alliance is frightening.

REP. MICHAEL MCCAUL, (R) TEXAS: The Islamic terrorist threat is real in Latin America and, obviously, the route they're going to get through are the drug cartels who control our border with Mexico.

LAVANDERA: The report says cartels are charging Middle Easterners as much as $50,000 a person to get smuggled into the U.S. For that kind of money, cartels will move anything.

MCCAUL: I don't think they really care who they're bringing across as long as they get paid for it. They're not going to screen these people and find out who exactly they are.

CLARK KENT ERVIN, CNN SECURITY ANALYST: Terrorism and drugs can work hand in hand and certainly, there's true for human smuggling as well. We know that the Department of Homeland Security and the FBI have been concerned about this potential alliance for quite some time.

LAVANDERA: But the southern border's a wide-open gateway in many places, like this little footbridge back in Hudspeth County, where crossing the border is easy.

MIKE DOYLE, HUDSPETH COUNTY SHERIFF'S DEPARTMENT: The south end of that bridge is in Mexico.

LAVANDERA: Chief Deputy Mike Doyle looks at this and wonders if he'll be able to stop the danger some fear could come his way.

DOYLE: Of course, there's always the possibility that a terrorist could slide in, maybe they have, maybe they haven't. I don't know. I have not caught one of them.

LAVANDERA: He worries they're out there and right now, he feels like a lone ranger in the west Texas desert.

Ed Lavandera, CNN, Dallas.

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ZAHN: And we're going to take a quick biz break right now. On Wall Street, the Dow flirted with 10,000 all day, finally closed at a new record high. At the closing bell, the Dow stood at 11 points above the 12,000 mark. For the day the Dow gained 19 points, the Nasdaq rose 3 points and the S & P picked up just one point. Possible bad news for oil and gas prices. The oil cartel OPEC, meeting in Qatar, has just decided to cut oil production by 1.2 million barrels a day. The production cut is specifically designed to boost oil prices, which have dropped more than 25 percent since July.

NBC has announced it's cutting some 700 jobs to save $750 million. Cost cuts will hit the news division and the MSNBC cable operation.

An update on a story we brought you a little bit earlier. A New York State Supreme Court judge ordered the one-time stock exchange head, former New York Stock Exchange chief, Richard Grasso, to give part of his $187 million pay package. New York Attorney General Eliot Spitzer called the pay package "excessive".

Coming up next, hold your fire. Find out why the Coast Guard is causing so much outrage with a little gunfire on the Great Lakes.

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ZAHN: Another top story in the security watch tonight takes us to our northern border. The Coast Guard is under fire because it wants to use the Great Lakes for target practice. Well, it has plenty of people outraged on both sides of the border.

JEANNE MESERVE, HOMELAND SECURITY CORRESPONDENT: A battle rages on the Great Lakes. Not with machine guns, but about them. For more than 200 years, the Coast Guard has conducted gunnery exercises on water. After 9/11, it put machine guns on some of its small boats to help with homeland security. Hitting a target in this environment requires a lot of practice.

UNIDENTIFIED MALE: We have compensate for the boat going up and also the swells in front of you at your target.

MESERVE: So the Coast Guard wants 34 permanent live fire training zones on the Great Lakes. Each would be closed to boaters about ten hours a year while the Coast Guard shoots. But it has created such a ruckus the Coast Guard has had to cease firing.

Even in the lakeside community of Grand Haven, Michigan, known as Coast Guard City, USA, the zones are controversial. A public meeting on the issue drew more than 100 people.

UNIDENTIFIED MALE: I'm a salmon fisherman and I troll out there. And I'm out there all summer long and I really don't want to get hit with a stray bullet.

UNIDENTIFIED MALE: (INAUDIBLE) is firing weapons at position...

MESERVE: The Coast Guard notifies boaters by radio wherever it trains. It stops firing if any vessel strays too close. But then, there is spent ammunition. A study commissioned by the Coast Guard says it will not hurt the environment. But not everyone buys that.

JAMES CLIFT, MICHIGAN ENVIRONMENTAL COUNCIL: If you add up all the rounds -- and it's hundreds of thousands of rounds a year -- that adds up to 7,000 pounds of lead into the environment, where all of Michigan businesses put together discharge about 4,000 pounds of lead into our waterways.

MESERVE: However, the very loudest objections to the permanent firing zones come from the other side of the lakes -- Canada -- whose government is concerned about the environment and safety.

Mike Bradley, mayor of Sarnia, Ontario, says permanent training zones are part of an unjustified militarization of the U.S./Canada border.

MAYOR MIKE BRADLEY, SARNIA, ONTARIO: I think it really shows a contempt for what was at one point the longest unattended border in the world. We no longer are.

UNIDENTIFIED MALE: We can all sit around and pine for days gone by, but that's not going to defend American citizens from a threat.

MESERVE: The Coast Guard says bridges essential to U.S.-Canadian trade, power plants and other structures all need protection.

(on camera): The Coast Guard will not resume live fire exercises until the public's concerns have been heard and considered. But the suspension is having an impact.

REAR ADM. JOHN E. CROWLEY, JR., U.S. COAST GUARD: Today, we have Coast Guardsmen who are not fully prepared for all risks, all threats, all hazards, to be ready all the time.

MESERVE: Because they haven't been allowed to do this?

CROWLEY: They are not certified and trained today.

MESERVE (voice-over): The Coast Guard says the live fire exercises are a matter of national security. But for some citizens here, where there has never been a terrorist attack, that seems a distant concern.

Jeanne Meserve, CNN, Grand Haven, Michigan.

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ZAHN: And we have one more thing on our security watch tonight. The U.S. is keeping a close watch on a North Korean cargo ship that recently left port southwest of Pyongyang. Two officials say the U.S. suspects the ship may be carrying equipment banned by the U.N. sanctions just imposed due to North Korea's nuclear program. The ship's destination is not known at this hour.

For some really good people, work is just the beginning. Next up comes a helping repair broken lives, helping build a new life for people after prison. Valerie Morris has tonight's "Life After Work."

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VALERIE MORRIS, CNN CORRESPONDENT (voice-over): As an antique dealer for 30 years, Martha Rollins worked at revitalizing used items, making them new and beautiful. Today, her work is similar. Only now, she's helping restore people who were previously incarcerated.

MARTHA FRANCK ROLLINS, FOUNDER, BOAZ & RUTH: We believe that the prisons and jails are filled with gifted people, and we're helping to release these gifts back to society.

MORRIS: Rollins founded Boaz & Ruth in Richmond, Virginia. It's a nonprofit offering jobs, career training and life lessons, like anger management and public speaking. Trainees work at one of Boaz & Ruth's six businesses. They are all located in an area desperate for an economic boost.

ROLLINS: It had been empty blocks, dealers on the corner selling drugs. High, high crime. And by locating the businesses here, where no sane retailer would ever go, we are bringing hope back to a neighborhood, and people are getting meaningful jobs and paying taxes and becoming productive citizens.

So, it's making a difference. And the most rewarding part of my job is living (ph) in the miracle of transformation of people and realizing that I'm transformed daily, too.

MORRIS: Valerie Morris, CNN.

(END VIDEOTAPE)

ZAHN: Now we move on to our nightly countdown of the top stories on CNN.com. About 21 million of you logging in today. Coming in at number 10, a funeral today in the Bahamas for Anna Nicole Smith's son Daniel, who died last month.

At number nine, federal authorities free a former Nazi concentration camp guard after failing to find a country willing to take him. He's been stripped of his U.S. citizenship.

Number eight, Jeffrey Sebelia is the big winner on the reality show, "Project Runway." There he is.

No. 7, a very bizarre case. Jeffrey Lundgren, who's on death row in Ohio, has filed a lawsuit claiming he's just too big to be executed by lethal injection.

No. 6, Microsoft releases a new web browser software product for the first time in five years.

Numbers five through one in just a few minutes. We hope you stay with us.

Then coming at the top of the hour, Larry King welcomes Illinois Senator Barack Obama, the man Oprah says should run for president. What do you think?

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ZAHN: Our CNN.com countdown continues now with No. 5. A Hurricane Katrina survival story ends in what looks like a tragedy. It centers around a couple that once lived in this New Orleans home. Police say they think the man killed his girlfriend, and then took his own life.

Four is tonight's top story. The latest bombshell in the Mark Foley congressional page scandal. The priest accused of molesting Foley when he was a teenager admits fondling him, but says they never had sex.

No. 3, Paul McCartney defended himself against accusations of abuse allegedly made by estranged wife Heather Mills. McCartney and Mills are in divorce proceedings.

No. 2, shocking video obtained by CNN of insurgents in Iraq launching sniper attacks on U.S. troops. You could see more of that on CNN.com.

No. 1, this stingray attacked an 82-year-old man in Florida when it jumped into his boat. The stinger lodged in his heart. It had to be removed. He's in critical condition tonight.

And we have some very good news to close with tonight about the return to the business of a colleague. Former ABC anchor Bob Woodruff, who was severely injured by a blast back in January in Iraq. As you could see from these pictures, he's healed remarkably well. ABC announced today that he will be back on the air this spring to report on the heroic efforts of military medical teams that save lives just like his.

He and his wife are also writing a book about his recovery, which has been long and very difficult.

That wraps it up for all of us here tonight. Tomorrow night, Senator Hillary Rodham Clinton on the 2006 reelection campaign trail. She has a big debate tomorrow night. But all anyone of course is talking about is 2008. Will she run for president or not? We're going to put that question to a top story political panel.

Again, we appreciate you dropping by here tonight. We hope you have a great night. We'll be back same time, same place tomorrow night. Until then, have a great night. "LARRY KING LIVE" starts in just about eight seconds. His guest tonight, Senator Barack Obama, a man who a lot of people think may run for president one day. Have a great night.

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